Professional Documents
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Introduction
Indian economic policy after independence was influenced by the
colonial experience (which was seen by Indian leaders as exploitative
in nature) and by those leaders' exposure to Fabian socialism. Policy
tended towards protectionism, with a strong emphasis on import
substitution,
industrialisation
under
state
monitoring,
state
intervention at the micro level in all businesses especially in labour and
financial markets, a large public sector, business regulation, and
central planning. Five-Year Plans of India resembled central planning in
the
Soviet
Union.
Steel,
mining,
machine
tools,
water,
telecommunications, insurance, and electrical plants, among other
industries, were effectively nationalised in the mid-1950s. Elaborate
licences, regulations and the accompanying red tape, commonly
referred to as Licence Raj, were required to set up business in India
between 1947 and 1990.
This development of the License Raj, stifled the initiative and
enterprise in the private sector, but at the same time they got
protection from foreign competition by means of import restriction and
high tariffs. By the absence of competition, the industries developed
with lack of cost and quality consciousness. At the same time the
public sector was growing and the share of public sector in the GDP
increased from about 10 percent in 1960-61 to 27 percent in 1988-89.
The main concern was that a majority of the PSEs were making losses
and had to be subsidized year after year.
Attempts were made to liberalise the economy in 1966 and 1985. The
first attempt was reversed in 1967. Thereafter, a stronger version of
socialism was adopted. The second major attempt was in 1985 by
prime minister Rajiv Gandhi. The process came to a halt in 1987,
though 1967 style reversal did not take place.
In the 80s, the government led by Rajiv Gandhi started light reforms.
The government slightly reduced Licence Raj and also promoted the
growth of the telecommunications and software industries.
The Vishwanath Pratap Singh (19891990) and Chandra Shekhar Singh
government (19901991) did not add any significant reforms.
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The low annual growth rate of the economy of India before 1980,
which stagnated around 3.5% from 1950s to 1980s, while per
capita income averaged 1.3%. At the same time, Pakistan grew
by 5%, Indonesia by 9%, Thailand by 9%, South Korea by 10%
and Taiwan by 12%.
Only four or five licences would be given for steel, electrical
power and communications. Licence owners built up huge
powerful empires.
A huge private sector emerged. State-owned enterprises made
large losses.
Income Tax Department and Customs Department became
efficient in checking tax evasion.
Infrastructure investment was poor because of the public sector
monopoly.
Licence Raj established the "irresponsible, self-perpetuating
bureaucracy that still exists throughout much of the country" and
corruption flourished under this system.
Indias fragile economy was plunged into a deep crisis-a crisis of macro
economic imbalances at the entry of the 1990s. The main factors
contributing to the crisis were:
- the Gulf war was leading to a sharp increase in the oil prices,
- decline in foreign exchange reserves since September 1990
leading to recourse to IMF borrowing,
- payment crisis leading to loss of confidence on the
Governments ability to manage economic environment,
drying up to short term credit, decline in Indias credit rating,
net outflow of NRI deposits; and
- above all, fiscal crisis-rising revenue and fiscal deficits leading
to fiscal imbalances and rising prices.
Then in July 1991 series of new policy measures known as Economic
Reforms was announced with a view to restoring confidence was
announced. These measures came in a package containing seven
reforms: (1) Fiscal Policy reforms, (2) Trade Policy Reforms (3) Industry
Policy Reforms (4) Financial Policy Reforms (5) Agricultural Policy
Reforms, (6) Poverty Alleviation Policy Reforms, and (7) Human
Resource Policy reforms. These reform measures are known as
stabilization and structural adjustment programme which started a
process of Liberalization and Fiscal Correction.
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NRI Remittances
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Banking Reforms
In order to facilitate the liberalization and to establish a positive
rapport with World Bank in the context of the grave foreign exchange
crisis, banking and financial sector reforms were also initiated.
Regulations in Indias financial sector and directions to banks for
greater financial discipline were issued. Private Sector banks including
foreign banks were encouraged to operate in India.
innovation and technology adoption remains dismal and they exist only
on back of government support. Their products are contested by
cheaper imports from China.
Impact on Agriculture
As already said, share of agriculture in domestic economy has declined
to about 15%. However, people dependent upon agriculture are still
around 55%. Cropping patterns has undergone a huge change, but
impact of liberalization cant be properly assessed. We saw under
series relating to agriculture that there are still all pervasive
government controls and interventions starting from production to
distribution (here SPS and here WTO).
Global agricultural economy is highly distorted. This is mainly because
imbalance in economic and political power in hands of farmers of
developed and developing countries. In developed countries,
commercial and capitalistic agriculture is in place which is owned by
influential Agri corporations. They easily influence policies of WTO and
extract a better deal for themselves at cost of farmers of developing
world.
Farming in developing world is subsistence and supports large number
of poor people. With globalization there has been high fluctuation in
commodity prices which put them in massive risk. This is particularly
true for cash crops like Cotton and Sugarcane. Recent crises in both
crops indicate towards this conclusively.
Also there is global Food vs. Fuel confusion going on. Sugar and corn
are used to manufacture ethanol which is used as fuel. In USA Corn is
produced mainly for this purpose, as sugar cane is in Brazil. Now there
are apprehensions that what if converting food into fuel is more
remunerative for producers? More than 1 billion people still live in
hunger, much more are just hand to mouth. It is futile to expect that
free market will take care of these people, who dont have any
purchasing power. Clearly, Agriculture is biggest market failure, but is
rarely discussed for being so in WTO.
Another global debate born out of globalization is one of GM crops.
Here too powerful MNCs like Monsanto hold the key. USA allows
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unhindered use of GM crops, but EU bans it. In India field trails are
going on. (It was discusses here)
On the positive note, Indias largely self-sufficient and high value
distinguished products like Basmati Rice are in high demand all over.
Generally speaking, India is better placed to take up challenge of
globalization in this case. If done in sustainable and inclusive manner,
it will have a huge multiplier impact on whole economy. Worldwide
implicit compulsion to develop Food processing Industry is another
landmark effect of globalization.
Apart from these, Farm Mechanization i.e. use of electronic/solar
pumps, Tractors, combines etc. all are fruits of globalization. Now
moving a step further, Information technology is being incorporated
into agriculture to facilitate farming.
Impact on Services Sector
In this case globalization has been boon for developing countries and
bane for developed ones. Due to historic economic disparity between
two groups, human resources have been much cheaper in developing
economies. This was further facilitated by IT revolution and this all
culminated in exodus of numerous jobs from developed countries to
developing countries. Here US have to jealously guard its jobs as we
guard our agriculture.
IT industry
Software, BPO, KPO, LPO industry boom in India has helped India to
absorb a big chunk of demographic dividend, which otherwise could
have wasted. Best part is that export of services result in export of
high value. There is almost no material exported which consume some
natural resource. Only thing exported is labor of Professionals, which
doesnt deplete, instead grows with time. Now India is better placed to
become a truly Knowledge Economy.
Exports of these services constitute big part of Indias foreign
Exchange earnings. In fact, the only three years India had Current
Account surplus, I.e. 2000-2002, was on back of this export only.
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Banking
Further, in banking too India has been a gainer. Since reforms, there
have been three rounds of License Grants for private banks. Private
Banks such as ICICI, HDFC, Yes Bank and also foreign banks, raised
standards of Indian Banking Industry. Now there is cut through
competition in the banking industry, and public sector banks are more
responsive to customers.
Here too IT is on path of bringing banking revolution. New government
schemes like Pradhan Mantri Jan dhan Yojana aims to achieve their
targets by using Adhaar Card. Having said this, Public Sector Banks still
remain major lender in the country.
Similarly Insurance Industry now offers variety of products such as Unit
Linked Insurance plans, Travel Insurance etc. But, in India life Insurance
business is still decisively in hands of Life Insurance Corporation of
India.
Stock Markets
Another major development is one of Stock Markets. Stock Markets are
platforms on which Corporate Securities can be traded real time. It
provides mechanisms for constant price discovery, options for
investors to exit from or enter into investment any time. These are
back bone of free markets these days and there is robust trade going
all over the world on stock exchanges. Their Importance can be
estimated from the fact that, behavior of stock markets of a country is
strongest indicator of health and future prospects of an economy.
These markets has thrown open wide array of associated services such
as Investment Banking, Asset Management, Underwriting services,
Hedging advice etc. These collectively employ lakhs of people all over
India.
Similarly there are commodities market which provides avenues for
investment and sale of various eligible commodities.
Telecom Sector
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ownership
in
all
telecommunications.
except
banks,
insurance
companies,
Infrastructure Development
Rapid growth in a globalized environment requires a well-functioning
infrastructure including especially electric power, road and rail
connectivity, telecommunications, air transport, and efficient ports.
India lags behind east and SE Asia in these areas. These services were
traditionally provided by public sector monopolies but since the
investment needed to expand capacity and improve quality could not
be mobilized by the public sector, these sectors were opened to private
investment, including foreign investment.
Civil aviation and ports are two other areas where reforms appear to be
succeeding, though much remains to be done. Indias road network is
extensive, but most of it is low quality and this is a major constraint for
interior locations. The major arterial routes have low capacity
(commonly just two lanes in most stretches) and also suffer from poor
maintenance.
The railways are a potentially important means of freight
transportation but this area is untouched by reforms as yet. The sector
suffers from severe financial constraints, partly due to a politically
determined fare structure in which freight rates have been set
excessively high to subsidize passenger fares, and partly because
government ownership has led to wasteful operating practices. Excess
staff is currently estimated at around 25 percent. Resources are
typically spread thinly to respond to political demands for new
passenger trains at the cost of investments that would strengthen the
capacity of the railways as a freight carrier.
Issues:
Regulation, public sector, corruption
India ranked 133rd on the Ease of Doing Business Index in 2010,
compared with 85th for Pakistan, 89th for People's Republic of China,
125th for Nigeria, 129th for Brazil, and 122nd for Indonesia.
Corruption in many forms has been one of the pervasive problems
affecting India. For decades, the red tape, bureaucracy and the Licence
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Environmental degradation
About 1.2 billion people in developing nations lack clean, safe water
because most household and industrial wastes are dumped directly
into rivers and lakes without treatment. This contributes to the rapid
increase in waterborne diseases in humans. Out of India's 3119 towns
and cities, just 209 have partial treatment facilities, and only 8 have
full wastewater treatment facilities (WHO 1992). 114 cities dump
untreated sewage and partially cremated bodies directly into the
Ganges River. Downstream, the untreated water is used for drinking,
bathing, and washing. This situation is typical of many rivers in India as
well as other developing countries. Globally, but especially in
developing nations like India where people cook with fuelwood and coal
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Conclusions
The impact of gradualist economic reforms in India on the policy
environment presents a mixed picture. The industrial and trade policy
reforms have gone far, though they need to be supplemented by labor
market reforms which are a critical missing link. The logic of
liberalization also needs to be extended to agriculture, where
numerous restrictions remain in place. Reforms aimed at encouraging
private investment in infrastructure have worked in some areas but not
in others. Progress has been made in several areas of financial sector
reforms, though some of the critical issues relating to government
ownership of the banks remain to be addressed.
Critics often blame the delays in implementation and failure to act in
certain areas to the choice of gradualism as a strategy and it needs to
be seen when joins the elite league of the most developed nations.
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